Please ensure Javascript is enabled for purposes of website accessibility

The $75 Billion (and Growing) Opportunity

By Tim Hanson - Updated Nov 11, 2016 at 4:55PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's even bigger than it sounds.

Peter Lynch is perhaps most famous for advising investors to "buy what you know." But "knowing," for Lynch, is not simply having a favorite restaurant or store. In the introduction to the millennium edition of One Up on Wall Street, he writes, "Never invest in any company before you've done the homework on the company's earnings prospects, financial condition, competitive position, plans for expansion, and so forth."

In other words, there's a lot more to "know."

Yet a recent AP headline reveals some of what was behind the frenzy that pushed the Shanghai Composite Index up 130% in 2006 and another 97% in 2007: "1st Time Investors Buy Up Chinese Stocks."

1999 all over again
Of course, these first-time investors probably did not know what they were buying. Here's a representative quote from last year: "'We can still make money,' Ding [Xiurui] said. ... Asked what stocks she would buy, Ding said, 'I don't know. I'm still learning.'"

If that sounds familiar, it should. Here's Steven Leeb writing about the tech bubble in his book The Coming Economic Collapse: "Millions upon millions of investors ignored time-honored principles for investing in stocks, such as due diligence and fundamental analysis, and began to buy and sell out of emotion. Believing in the wonders of technology, they rushed to buy technology and Internet stocks like rats following a Wall Street pied piper."

And in 2008, the Chinese stock market looks a whole lot like tech stocks did in 2001 -- it's down more than 60%!

China: The next wonder of the world
Although the excitement surrounding the Chinese market is subsiding, at current prices, China stocks are starting to look like very promising long-term investments. After all, this is a country that has posted nearly 9% annual growth in gross domestic product over the past five years. And despite the recent drop, an investor who threw $10,000 at the iShares FTSE/Xinhua China 25 Index (FXI) when it started trading in October 2004 would have more than $14,000 today. Given current conditions, that's not a bad return from a fund that's invested in giant state-owned companies such as China Life Insurance (NYSE:LFC), CNOOC (NYSE:CEO), and China Telecom (NYSE:CHA).

And if you're thinking that the boom and bust in China's stock market resembles quite closely the boom and bust we saw on the Nasdaq in 2000, well, you're right. But if you took advantage of that downturn to buy long-term winners such as Gilead Sciences (NASDAQ:GILD), you've done very, very well.

History repeats itself
So while the China market is coming to terms with reality, there are individual companies that will continue to profit from this enormous economic growth engine. Remember: No matter what its relatively immature domestic stock market says, the opportunities in China are huge. If they weren't, companies such as Yum! Brands (NYSE:YUM), Nike (NYSE:NKE), and many more wouldn't be investing so heavily in the country. According to the American Chamber of Commerce, sales by American companies in China topped $75 billion in 2004.

That number has only gotten bigger.

A growing $75 billion opportunity
Just as the potential rewards of investing in China make it imperative that U.S. companies invest there, it is imperative that individual U.S. investors put some money to work there as well -- even as the market drops.

That means focusing on quality companies and buying on dips -- like the one we're seeing today -- and having the patience to hold them for the long term. How does one do that when the companies are operating all the way around the world? We put that question to Oakmark International manager David Herro recently, and here's what he said: "That's why I'm in Japan right now with two other analysts. We're visiting companies. Our team spends a lot of time overseas trying to understand how company managements think."

That's the same reason why our Motley Fool Global Gains team was recently in China on a research trip. So if you'd like to invest some of your portfolio in a few carefully chosen Chinese companies but don't have the time to travel to China -- and don't want to pay the fees associated with active mutual fund management -- consider joining our Motley Fool Global Gains international-investing service.

There is no obligation to subscribe. Click here for more information.

This article was first published on May 21, 2007. It has been updated.

Tim Hanson does not own shares of any company mentioned. CNOOC is a Motley Fool Global Gains recommendation. The Fool's disclosure policy never drops it, even if it's hot.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$118.44 (1.29%) $1.51
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
GILD
$62.17 (0.27%) $0.17
CNOOC Limited Stock Quote
CNOOC Limited
CEO
China Telecom Corporation Limited Stock Quote
China Telecom Corporation Limited
CHA
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$113.06 (2.68%) $2.95
China Life Insurance Company Limited Stock Quote
China Life Insurance Company Limited
LFC
$7.32 (-0.61%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
373%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/10/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.